National Pensions Savings Scheme could lead to 200,000 job losses and hit small firms hardest

New research by the University of Warwick’s Institute for Employment Research reveals that the UK’s new National Pensions Savings Scheme (NPSS) could lead to the loss of up to 200,000 jobs, the vast majority of which would be in small firms.

Following recommendations of the Pensions Commission (The Turner Commission), the UK Government has legislated for the creation of a system of Personal Accounts. These would be available for all workers whose employer did not offer at least an equivalent retirement benefit. Workers are to be automatically enrolled and would have to take deliberate steps not to participate. If they do not opt out, not only do they make a contribution, their employer has to pay 3% of earnings into the pension account.

The new scheme is to go live in 2012. Of the firms not having pensions that meet NPSS standards, nine out of 10 have fewer than 10 employees.

The Pensions Commission, and later the Department for Work and Pensions, carried out their own cost estimates for the proposal for an NPSS and suggested it would lead to an increase in labour costs of some 0.6% for all firms and 1.1% for the smallest firms.

However, new research by Bernard Casey at the University of Warwick Institute for Employment Research indicates that, if administration costs and the range of salary levels of the people at whom NPSS is aimed are taken into account, and if the take-up levels to which the government aspires are reached, the NPSS is likely to cause labour costs to rise by close to 2%.

His research, entitled ‘The National Pensions Savings Scheme: Its Implications for Small Firms’, has just been published in the International Small Business Journal. The paper includes findings drawn from a special survey of companies that, although making no mention of the Pensions Commission or the government’s plans, sought employers’ reactions to various increases in labour costs, including one of 2%. The answers given allowed him to estimate the number of firm closures and of reductions in employment for each one of these increases.

Many firms claimed that they would do nothing at all, and many more said they would try to pass the costs onto their customers. Bernard Casey points out that, even if they did not say they would close down or cut employment, there could well be negative ‘second round’ effects. Many of the employers who said they would do nothing or pass on costs admitted to facing substantial competition. The higher costs the NPSS brought with it might well weaken them and lead to business failures and redundancies.

Bernard Casey says: “The research was carried out well before the start of the current recession and when the economic environment was benign. Given the circumstances in which the new arrangements will be introduced, considerably worse outcomes than those predicted could be expected.

“Improving pensions is a laudable objective. However, it is unwise to think that better pensions can be had without a cost. Policymakers should be explicit about this cost. They should also consider whether arrangements other than Personal Accounts might do a better job.”